1/09/2006 @ 11:05AM

Swimming In A Crowded Pool

The grocery aisles are awash in water: mineral, spring, sparkling, still, flavored, caffeinated, vitamin-enhanced and something called “ultra” water. With Aquafina, Evian, Dasani, Fruit2O, Propel, VitaminWater, Poland Spring, Perrier and FIJI brands all wrestling for shelf space, can there possibly be room for one more?

Tom First–founder of O Beverages in Cambridge, Mass.–thinks so. He’s one of the “Two Toms” behind the popular juice company Nantucket Nectars, launched in 1989. Now the 39-year-old aims to make another splash: selling sugar-free flavored water to health nuts who hawk their sugar intake but want more pizazz than found in plain old H20. (As in other fruit-flavored drinks, the water contains natural fruit extracts that add flavor without the calories.)

Too bad he doesn’t have first-mover advantage. The three biggest sellers of bottled water in the U.S.–Nestlé,
PepsiCo
and
Coca-Cola
–introduced sugarless flavored water in 2005. They also have plenty of marketing muscle and sprawling distribution networks. All that firepower is chasing a relatively small market: In 2004 (the latest available figures), the U.S. wholesale market for flavored water was a puny $170 million, versus $47 billion for soda, $14.4 billion for fruit beverages and $9.2 billion for plain bottled water. As for growth, sales of flavored water could go to $800 million by 2009, says Beverage Marketing, a research firm.

First’s gimmick: While the big guys all use Splenda, an artificial sweetener made by a unit of
Johnson & Johnson
, O uses all-natural ingredients combined with an ultra-purification technique, yielding a flavored water that, First insists, is “as healthy as it gets.” (The “O” in O Beverages suggests a zero–as in zero contaminants.) Nestlé positions its Pure Life brand as a “flavorful beverage that is calorie-free,” says company spokeswoman Jane Lazgin, while Coca-Cola spokesman Ray Crockett says Dasanis flavored water is “healthful to the extent that water products are healthful.”

Cashing in on his Nectars success–
Cadbury Schweppes
bought the company for an undisclosed amount in 2001–First corralled several million in startup capital from the likes of celebrity chef Ming Tsai, host of East Meets West and Mings Quest on E.W. Scripps‘
Food Network, and Minnesota Timberwolves forward Kevin Garnett. He also kicked in his own cash, in the “significant six figures.”

To help mount the attack, First brought in Edward Slade, former president of FIJI Water and marketing guru at Evian. It’s a nice balance, with First the risk taker and Slade the sober operator. Last fall the two were launching a new strawberry flavor, to go along with mandarin orange, lemon and lime, and wild berry. “I want to get it formulated, packaged and out there in four days,” says First, while Slade would rather spend more time refining the flavor and the labeling. “I depend on him to tell me when I am reacting too quickly or too emotionally.”

First will also lean on the hard lessons from his days at Nantucket Nectars. Like the time he burned through $2.5 million in 18 months trying to set up Nectar’s own distribution network. At one point, a key investor issued an ultimatum: Turn the business around or face liquidation. “We had plenty of windows open, and the money was going out every one of them,” First recalls. “Trucks were crashing into buildings, inventory was miscounted and products were breaking. I call the experience my $2 million M.B.A.”

Today O Beverages uses many of the same independent distributors First cultivated at Nectars. This time around he should have better luck in high-volume supermarkets: While customers prefer to purchase juice in larger containers, they tend to buy lots of water in single-servings–both individual bottles and cases of them. Better yet, flavored-water margins are slightly better than juice margins, says First, though he won’t release specific figures.

Packaging is another matter. First traded the heavy glass Nectars bottle for a tapered plastic container sporting a brightly colored, clean-feeling label. The problem was that the bottles were nearly impossible to label at high speeds because of their sloped shape. (The company eventually had to order a custom machine from Italy for its factory in Pennsylvania to handle the bottles.) First says labeling snafus delayed distribution almost four months, well past his initial spring launch date.

For all the growing pains, First says he gets more than a hundred encouraging e-mails a week from consumers visiting the company Web site. He has also received requests from high schools in New Hampshire, Massachusetts and Connecticut looking for sugarless drinks for their students. Annual revenue is now around $1 million–not bad on a limited marketing strategy that amounts to First and Slade driving to in-store promotions.

The company has yet to land any national supermarket deals (though one is in the works), but First plans to expand beyond his Northeastern trappings into Illinois, Florida and California in 2006. If all goes well, he will boost his marketing budget to at least 10% of revenue, he says.

First says he would be disappointed if O werent profitable on an operating basis by the end of 2007. “I like being the underdog,” he says. “O is going to be an iconic brand in the beverage industry.”